I believe that a small universe of experienced and well educated investment professionals using a disciplined process and sophisticated analytical tools can consistently add value to client portfolios. According to wide data, this universe is about 1 in 5 people providing financial services add value.
At the core of adding value to investment portfolios are four core concepts regularly ignored by the investing public and financial industry:
- Maintain a margin of safety and liquidity.
- Focus on the value of assets over short term price fluctuations.
- Ignore the crowd and maintain emotional control.
- Be Patient.
My philosophy and methodology do not generally coincide with the approach taken by most investors. Usually, the mass media, public at large and too many financial advisors are most interested in "hot" or "in the news" short term ideas, leading them to be emotional and unfocused. The end result is that most people end up being price speculators, not investors, regardless of what they intended to be.
Further, too many people care too much about "the market" and the next trade. The market is made up of companies that are made up of people. Finding a good investment begins with finding good people who make up a good company, not trying to guess which way "the market" will go in a short-term time frame.
So, while a small universe of high frequency traders can skim the markets (for now) and influence price directions for moments in time, during those moments when a share price is driven down on a wonderful company, it is then, that the long-term, smart, emotionally stable, patient investor can build an investment position that matters.
I am always cognizant of the advice that my first landlord gave me, "Kirk, if you want to learn how to do something, learn from people who have already done it." In managing money, I look to the great investors for guidance and direction, not the financial industry sales machine.
“Wide diversification is only required when investors do not understand what they are doing.” Warren Buffett
Most investors are "over-diversified" owning far too many investments via mutual funds, annuities, retirement plans, etc... Mathematically we know that there is little to be gained from diversification once a certain number of holdings have been reached. So while we do diversify, we only do so up to the level where we reduce risk, not to the point where we water down returns. Many other financial people use "diversification" and "asset allocation" as buzz words for the obvious reason - see Warren Buffett's quote above.
“We just throw some decisions into the 'too hard' file and go onto others.” Charlie Munger (Buffett's partner at Berkshire Hathaway)
Many times we miss an opportunity because the analysis is just too complex. In those cases, we wait for another opportunity. Because of this cautious approach to investing we will not always beat a portion of a market cycle. However, I am very comfortable and confident that we will beat most complete market cycles when all is said and done. To paraphrase Munger again, "I take the cautious approach and that seems to work out pretty well."
"I'm missing it" and "this time is different" are two of the most dangerous phrases in investing. There is always another opportunity, thus, reaching out for risk is rarely a wise idea. And, although there will be a handful of true paradigm shifts in a lifetime, in general, cycles repeat with only minimal variation owing to the relative consistency of human psychology, i.e. fear and greed.
The one "paradigm shift" that investors ought to be aware of is that the United States will be free from importing oil and natural gas from OPEC in the very near future. This will have an enormous impact on the American economy for the better by decade end.
What Bluemound and I Will Do For You
I partner and consult with several other top investment professionals. We support each other's research and challenge each other to find ideas that lower risk while allowing for return. I will offer to be your funnel for finding the right investments for your portfolio.
I use a very basic investment asset allocation approach discussed in the "Intelligent Investor" written by Benjamin Graham - Warren Buffett's mentor. In short, after long periods of upward momentum in the stock market, we reduce our stock market exposure and after deep stock market corrections we add to our stock market exposure. In simpler terms, we do our very best to buy low and sell high. The process is slow moving as most upward moving stock markets - bull markets - last three to five years, and downward moving markets - bear markets - last six months to three years. Thus, large asset allocation changes only occur a few times per decade.
For more information and to discuss how this approach can benefit you, please email me or call directly by telephone at 414-617-6669.